August 2, 2012
Special Tax Benefits for Armed Forces Personnel
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On December 22, 2017, The Tax Cuts and Jobs Act was signed into law. The information in this article predates the tax reform legislation and may not apply to tax returns starting in the 2018 tax year. You may wish to speak to your tax advisor about the latest tax law. This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
U.S. military personnel and their families face unique life challenges with their duties, expenses, and transitions. The tax code includes numerous special tax benefits that are available to them. Here are several of the most prominent of those tax breaks:
- Moving Expenses - Generally, to deduct moving expenses, the distance to the new job location from the old home must be at least 50 miles farther than to the old job location from the old home to qualify for a moving deduction. In addition, an employee must work in the area of the new job full-time for 39 of the first 52 weeks (9 months). Both the distance and time requirements are waived if you are a member of the Armed Forces on active duty and you move because of a permanent change of station.
- Mortgage Interest and Taxes - A military taxpayer can deduct mortgage interest and real estate taxes as an itemized deduction, even if they are paid with nontaxable military housing allowance pay. The home mortgage interest is, however, still subject to the general rules for deducting home mortgage interest.
- Home Sale Gain Exclusion - Generally taxpayers can exclude $250,000 ($500,000 for a married couple) of the gain from the sale of their home if they owned and used the home as a principal residence for 2 of the 5 years prior to the sale. In addition, a reduced amount of gain exclusion may apply if the 2-year rule is not met because of an unforeseen circumstance that was not anticipated when the home was purchased, such as a work-related move of over 50 miles. Thus, a military taxpayer who sells his or her primary residence and does not meet the two-out-of-five-years ownership and use tests due to a move to a new permanent duty station may qualify for a reduced maximum exclusion amount.
A military taxpayer may also choose to suspend the 5-year test period for ownership and use during any period the taxpayer (or spouse) serves on qualified official extended duty as a member of the Armed Forces. This means that the 2-year use test may be met even if, because of military service, the taxpayer did not actually live in his or her home for at least the required 2 years during the 5-year period ending on the date of sale. The period of suspension cannot last more than 10 years and can be revoked by the taxpayer at any time. The 5-year period cannot be suspended for more than one property at a time. For this purpose, a military taxpayer is on qualified official extended duty when the duty station is at least 50 miles from his or her main home, or while residing under orders in government housing for more than 90 days or for an indefinite period. - Combat Pay – If you serve in a combat zone as an enlisted person or as a warrant officer for any part of a month, all your pay received for military service during that month is not taxable. For officers, the monthly exclusion is capped at the highest enlisted pay, plus any hostile fire or imminent danger pay received. You can also elect to include your nontaxable combat pay in your "earned income" for the purpose of claiming the Earned Income Tax Credit.
- Extension of Deadlines – The deadline for filing tax returns, paying taxes, filing claims for refund, and taking other actions with the IRS is automatically extended for qualifying members of the military. The extension is for 180 consecutive days after the later of:
• The last day that a military taxpayer was in a combat zone/qualified hazardous duty area, served in a qualifying contingency operation, or had qualifying service outside of the combat zone/qualified hazardous duty area (or the last day the area qualifies as a combat zone or qualified hazardous duty area) or
• The last day of any continuous qualified hospitalization for injury from service in the combat zone/qualified hazardous duty area or contingency operation or while performing qualifying service outside of the combat zone/qualified hazardous duty area.
In addition to the 180 days, the deadline is also extended by the number of days that were left for the individual to take an action with the IRS when he or she entered a combat zone/qualified hazardous duty area or began serving in a contingency operation. - Uniform Cost and Upkeep – If military regulations prohibit you from wearing certain uniforms when off duty, you can deduct the cost and upkeep of those uniforms, but you must reduce your expenses by any allowance or reimbursement you receive.
- Joint Returns – Joint income tax returns must be signed by both spouses. However, when one spouse is unavailable due to military duty, a power of attorney may be used to file a joint return.
- State Taxes – Military taxpayers do not lose or acquire a new residence or domicile when they are required to relocate to comply with military orders. Thus, in most circumstances, they will continue to be taxed by their home state. In most cases, tax law also exempts personal service income and wages earned by taxpayers who reside with their military spouses from being taxed by a state other than the spouse's resident state.
- Travel to Reserve Duty – If you are a member of the US Armed Forces Reserves, you can deduct unreimbursed travel expenses for traveling more than 100 miles away from home to perform your reserve duties.
- ROTC Students – Subsistence allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay – such as pay received during summer advanced camp – is taxable.
- Transitioning Back to Civilian Life – You may be able to deduct some costs that you incur while looking for a new job. Expenses may include travel, resume preparation fees, and outplacement agency fees. Moving expenses may be deductible if your move is closely related to the start of work at a new job location and you meet certain tests.
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